†† A group of pallet recyclers has fired what could be the most significant shot in the battle over CHEPís dealings with the U.S. pallet industry. A handful of recyclers has sued Brambles Industries (the parent company of CHEP), alleging numerous violations of U.S. antitrust law. Filed last month in federal court, the case could have a significant impact on the industry as a whole if the court decides to certify the lawsuit with class action status.

†† The complaint alleges that ďCHEP has used and continues to use threats of legal action against recyclers, as well as actual lawsuits, civil and criminal, with the intention of unlawfully transferring a portion of its business operational costs onto pallet recyclers.Ē ††††

†† The lawsuit also contends that CHEPís actions have created an unfair market situation that lowers its costs while increasing that of its rivals. It further claims that CHEPís actions have developed barriers to entry for new companies that are scared away by CHEPís business practices.

†† Jim Taylor, president and owner of Best Pallet in Fort Smith, Ark. has spearheaded the class action effort. He started the Web site www.chepclassaction.com more than a year ago and has worked tirelessly to put together a coalition of recyclers that would challenge CHEP. Other plaintiffs include: ITNOLAP Pallet & Crating Inc. of Murfreesboro, Tenn., Pallet Express Inc. of Greensboro, N.C., and Goemanís Wood Products of Hartford, Wis.

†† Although CHEP has encountered other cases in the past, this is the first class action lawsuit brought on behalf of pallet recyclers. Unlike previous cases in Georgia and Ohio, this new lawsuit focuses mainly on antitrust concerns and not questions of proprietary pallet ownership, property abandonment or unjust enrichment.

†† Class action status presents a whole new situation for recyclers because previous legal efforts focused on only one or two companies. Those served as primarily legal precedent that could have been relied on in further litigation. This lawsuit could apply to the entire industry if the court certifies it with class action status. If certified, the lawsuit would apply to any recycler in the lower 48 states that has received CHEP pallets under the normal course of business in the past four years. Companies are free to decide whether or not to participate in the outcome. A class action lawsuit provides tremendous benefit to recyclers at little risk.

†† While CHEP has been compensating recyclers for the return of stray pallets for a number of years through its Asset Recovery Program (ARP), many recyclers contend that the pay amounts to far less than the service is worth. The Pallet Enterprise has covered this in detail in previous issues. Besides some fuel increases, CHEP has refused to revisit its ARP compensation levels or negotiate on a regional basis. While costs continue to go up for recyclers, CHEP has been able to keep its costs flat. All of this has happened at a time that CHEP has experienced strong profit growth.†

†† The recyclersí complaint seeks monetary damages as well as a permanent injunction that would prohibit CHEP from activities that push its business costs onto the backs of recyclers. The injunction aspect of the complaint could have a major impact on CHEPís recovery practices depending on what shakes out in the long run.

†† Recyclers donít have to do anything at this time to be involved. If the case is certified for class action status, an announcement would be sent out when the court makes a decision on a legal remedy. However, pallet companies may want to begin documenting their CHEP pallet activity if this is not already being done.

†† One source familiar with the case said that this lawsuit could be the most significant action in the industry since CHEP first entered the U.S. market in the 1990s.†

†† Representing the recyclers are Herbert Schwartz of Bailey and Gaylen, Houston, Texas and Joe Byars of Christian and Byars, Fort Smith, Ark. Schwartz specializes in antitrust and trade regulations. In the past, CHEP was able to outlast individual recyclers by drawing out the legal process. However, the group behind the current lawsuit admits that it could take years to settle and are willing to go as long as it takes.

†† Since scoring some early legal victories, CHEP shows some vulnerability in court. CHEP encountered a major loss in the outcome of the Mock Pallet case that was finished in 2006. Ricky Mock of Mock Pallet Co., Covington, Ga. received $5 per pallet for fees associated with the retrieval and return of stray CHEP-marked pallets. The ruling remains the highest judicial decision in the country on fair compensation for recycler services. CHEP tried to downplay the result at the time pointing to the fact that it was based on a legal provision not found in other states. By contrast, this lawsuit focuses on a key provision of U.S. law that applies throughout the country. Regardless of the outcome, if this case goes to trial, it will have a major impact on both recyclers and CHEP.†

†† Beyond simply measuring the impact on one recycler, this case seeks to determine the impact of CHEP on the whole industry. The recyclers contend that CHEPís actions have made white wood pallets less competitive. This aspect of the case raises significant questions about the competitiveness of the used pallet exchange model versus a leased pallet system. Is one better than the other? Is CHEP cheaper only because of cost shifting? Those questions will get tossed around in court if this case ever goes to trial.

†† Schwartz and Byars wrote in the complaint, ďAbsent CHEPís unlawful conduct, and in a free wood pallet market unburdened by CHEPís overhead cost shifting to the pallet recyclers, the wood pallet market would present to the customer a truly competitive price from which to select among recyclers and CHEP.Ē

†† Nobody knows what will happen. If the court decides to certify the class and hear the case, would CHEP seek to settle? Would CHEP risk the outcome of a national class action case that could seriously undermine its business strategy? Thatís an awfully big gamble for a company that many industry insiders believe is managed with a close eye on the attitudes of the financial markets. Do the recyclers really stand a chance of winning?

†† One thing is for sure, this case goes beyond anything we have ever seen in the pallet industry.† The lawsuit makes some very strong claims. Schwartz and Byars wrote in the complaint, ďLeft undeterred and unrestrained, CHEP inevitably will meet the classic definition of a monopolist; the ability to control price and output both of which because of its inevitable exclusion of the recycler class as a viable competitive force.Ē

†† CHEP could not be reached for comment.

†† The recyclers have asked for a jury trial, which CHEP will likely oppose. The last time a jury decided on CHEPís ARP, it awarded Mock Pallet nearly $20 per pallet for returns to CHEP, which was eventually overturned on appeal.

†† Given the high stakes of the lawsuit, it could take a long time for the case to be decided if the court decides to hear the lawsuit at all. The first major hurdles are getting the court to certify the class action status and determine that there is sufficient cause to allow the case to proceed. It is just too early to know when the court might decide on these issues.

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